Moving into a retirement community which offers deferred fees could help retirees reduce their inheritance tax (IHT) bills, experts have said.
Data from estate agency, Savills, found older people now hold £2.95trn in housing wealth – and with IHT coming into the scope of pensions from 2027, more families will be faced with a tax bill once their loved one dies.
Although not suitable for everyone, to avoid a large bill, some are looking at moving into a retirement community and deferring their fees. This could work as an IHT tax benefit as the fees fall outside of the estate on death.
Integrated retirement communities – which are also known as modern housing-with-care schemes – offer self-contained homes for sale, shared ownership or rent. They include a 24-hour on-site staff and typically have a restaurant, leisure club, activities schedule and optional care services.
When someone moves into a retirement property, the fee is normally agreed upfront but if someone chooses to defer fees, it is not paid until the property is sold and it means it does not count toward the value of the estate; only the property itself counts.
For example, if a home is valued at £400,000 and there is a deferred fee of 20 per cent, when an individual passes, the estate will be valued at £320,000 (£400,000 minus 20 per cent).
This means it may not fall under the umbrella of IHT, saving families of loved ones a large bill upon death.
Chris Etherington, tax partner at RSM UK, said that any liabilities that are outstanding at the date of death can usually be deducted against other assets in the estate, which could lead to a reduction in the amount of IHT that is paid.
He said: “It may not be appropriate for everyone but for some, it could mean they have more to spend during their lifetime and can offset the costs against other assets which might otherwise be taxable at up to 40 per cent.”
IHT is paid on the estate of someone who has passed away. There’s normally no tax to pay as long as the value of the estate is below £325,000. If you give away your home or “main residence” to your children, your threshold can increase to £500,000.
Although IHT is owed by small numbers currently, this figure is set to grow. This is partly because the £325,000 threshold is frozen, and with inflation, the number of people with estates larger than this will grow.
Another key factor is that pensions are currently exempt from IHT when the estate is calculated, but from next year this will change, meaning many families are looking for ways to avoid potentially large bills.
A resident of the retirement living community Riverstone, who did not wish to be named, moved into his home three years ago with his wife when they were 61, with a view to hopefully avoid large tax bills by deferring fees.
He said: “When my wife said to me, she had found this retirement community, I said to her, ‘Are you mad? I am 61 years old.’ She dragged me down to [view the community], and I felt I needed to tick all the finance boxes. I spent quite a bit of time doing my own due diligence.”
From a financial perspective, the resident liked the deferred fees for several reasons, with the IHT benefit being a “big tick”.
What is a deferred management fee?
A deferred fee is paid when a person comes to sell their retirement property.
This fee covers the cost of works, improvements and community infrastructure.
What the fee is can vary, but the industry average is around 27 per cent of the purchase price of the property.
Therefore, a property costing £500,000 would have a deferred fee of around £135,000.
“For example, if an apartment costs £1mn, I only technically must come up with £650,000 of my own resources because I partner with Riverstone on the other £350,000.
“When my wife and I die, the estate won’t have the full ticket price; it’ll only have my equity portion,” he explained.
What surprised the resident was the other benefits, aside from financial ones, that moving into a retirement community provided.
“I didn’t feel the need to make any new friends, so the attraction of the community didn’t [initially] really pull me.
“Now I look back, my wife and I have made a lot of friends. And if you spoke to the residents, what you’ll find is people come for different reasons,” he added.
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Downsides of deferring fees – what you need to know
For those considering buying a property with deferred fees, experts said it was important for people to ensure the community is an ARCO-approved provider before buying.
ARCO, the main body representing the retirement community sector, also warned retirees to take care in understanding what is covered by the fees and what is not.
“Family members or children should also understand the deferred management fee arrangement so that they are not surprised by it after someone has passed away,” a spokesperson said.
Retirement properties which offer deferred fees would not work for people who cannot afford to buy a unit in the scheme at all, ARCO warned.
“Customers should always be independently advised, and ARCO members are required to advise customers to seek independent legal and financial benefits advice when considering a move to an integrated retirement community,” the body added.
Nimesh Shah, chief executive at Blick Rothenberg, urged people to check with the provider what the cost of the retirement property would be if they paid the service fee during their lifetime, rather than letting it accrue until death.
He said: “When I have looked at these schemes (similar to equity release), the provider will build in a premium because they are not receiving the money until the person dies. Is it actually better to pay as you go, assuming you have the cash to do so?”
Shah also urged people to check what their estate is actually worth and if they would be paying IHT in the first place.
“Don’t let a perceived tax benefit become a carrot to enter into these arrangements.
“The main point here is to calculate the value of your estate – if your estate is below the inheritance tax nil rate band, then you don’t have to pay inheritance tax.”
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